On 22 December 2017, the US President signed the Tax Cuts and Jobs Act, which provides for significant and wide-ranging changes to the taxation of corporations. The reforms are complex, and it will take some time to assess the implications thoroughly, but broadly the implications are: a) a reduction in the Federal tax rate from 35% to 21%, with various measures to broaden the tax base including restrictions on interest deductibility and other anti-avoidance measures; and b) the introduction of an exemption for foreign dividends (currently such dividends are taxed at the US federal rate, with credit granted for foreign taxes suffered). In return for the latter benefit, a one-off transition tax (which can be spread over 8 years) is payable in respect of cumulative retained earnings of foreign subsidiaries at a rate of 15.5% for earnings represented by cash or cash equivalents and 8.0% for the balance of such earnings.

These US tax reforms will give rise to significant consequences, both immediately in terms of one-off impacts relating to the transition tax and the measurement of deferred tax assets and liabilities and going forward in terms of the Group’s Adjusted ETR and cash tax rate. An initial review and estimate has been undertaken, which will be updated over the coming weeks and months as the Group works through the detail of these complex changes with its advisors and guidance is issued by the US authorities. Based on the Group’s initial estimate, the transition tax and re-measurement of deferred tax balances are estimated to give rise to a one-off credit to the income statement in the period to 30 April 2018 of $600m to $700m.

Going forwards, in the medium-term, the reforms are estimated to reduce the Group’s Adjusted ETR to 25%. The cash tax rate (including transition tax payments) is expected to be significantly lower than the Adjusted ETR in FY18 and FY19 (c.15% cash tax rate) due to the utilization of US tax attributes in the HPE Software group and to be broadly aligned with the Adjusted ETR from FY20 onwards. Due to being spread over 8 years, transition tax payments, do not have a significant impact on the cash tax rate.